Taxpayers caught in a vice

With the construction industry in such a parlous state it is no mean task to make a contract stick – to get paid that is – whether you are a small sub-contractor or a state government.

Creditors of collapsed builders Reed Constructions, Kell & Rigby and St Hilliers are finding this out. All three, incidentally, had variously failed to file their accounts on time over the years – an act which might have put their creditors in the picture a little earlier, as to the state of their financial affairs. (A fourth firm, Hawkins Construction, is also struggling to make some of its commitments.)

In any case, two vital questions arise from the collapse of construction companies:

One, how are staff and creditors protected when the builder falls on hard times and transfers its assets and contracts to another entity and starts again under a new name? This issue is the situation now, for instance, with Reed.

Two, why should the taxpayer pay to complete a project – as this the case with Victoria’s Ararat Prison – when the private sector operators blow up and fail to meet the obligations under their contracts?

First to Reed Constructions Australia; having made a killing two years ago from the federal government’s school building program, Geoff Reed’s private building company fell victim to the appalling industry conditions and called in administrators Ferrier Hodgson last week.

Just days before going under however, Reed transferred a $90 million earthworks contract for the Gladstone LNG project in Queensland to another company within the Reed stable.

The move is believed to be at the behest of Reed’s bankers and came in the wake of another asset transfer – a contract on the NSW law courts project – to a newly named holding company RBG Holdings Pty Ltd (RBG stands for Reed Building Group).

It seems there is no one to stop building companies from calling in voluntary administrators and transferring assets to another clean corporate entity and starting anew. Although it should be said that a construction contract is often an asset which requires a lot of work to be done and a lot of money spent before its value is realised.

And in the case of the LNG contract, the lead firm on the site, McConnell Dowell, apparently approved Reed novating its lease to another company as long as workers and creditors were paid. For their part, the builders contend that it is better that some entity survives and the project continues in another corporate form. In this way, workers, they argue, are better protected.

Still, it is clear that no government agency is policing the situation and lots of creditors are not getting paid as their counterparties restructure.

And as there is no relief on the way in terms of an improving economy, things are destined to get worse for the industry before they get better.

Window woes

The $400 million Ararat Prison PPP in Victoria collapsed last month when the two builders St Hilliers and Hawkins Construction struggled to meet their obligations.

Ironically, part of the problem was that the windows and the doors for the building had been imported from China and didn’t fit. Having windows and doors that don’t fit is hardly an optimal outcome for a prison, as one of the unions wryly observed.

St Hilliers principal Tim Casey, in his remarks to a subsequent creditors meeting described just how dire things were.

Construction companies were competing for jobs with little or no margin just to keep their workforce ticking over. Casey’s rivals are saying much the same.

If anything went wrong, as things often did on a building job – say bad weather or labour disruptions – the company lost money. And the weather has not been good this year.

Meanwhile, Casey’s joint venture partner at Ararat, the New Zealand-based Hawkins Construction has been quietly shifting assets out of the guarantor company into six new holding and operational companies.

Searches of the New Zealand Companies Office for Hawkins Construction show that six new companies have been incorporated this year which begin with the words “Hawkins Construction”.

It appears that they are all new holding companies and regional operational companies (Hawkins Construction North Island and Hawkins Construction South Island and so forth).

It is a wind-change indeed for a company which has operated under one name and in the same corporate guise since it was first established in 1946.

It is only an assumption, but a reasonable one nevertheless, that this restructure has been designed to minimise exposure to any guarantees which Hawkins might have given to the prison project as it has coincided with the troubles at Ararat.

Risk return

Meanwhile, the whole point of the PPP – public private partnership – is for the government to offset its risk and costs of construction. If the private operator gains the rewards, which are often lavish, it should also bear the risk, fully.

Although the likes of the big NSW toll-road deals (whose contracts remain cloaked in secrecy till this day) have failed shortly after construction, it seems Ararat is the first to collapse before the project had been completed.

This leaves the state in the invidious position of urgently needing new beds for its prisoners while the unions and creditors of the project are clamouring for recompense.

Yet the two major equity providers on the job, which had been contracted to complete the work for a fixed price, appear to have walked away.

They may well argue that, on a narrow legal interpretation of the contract, they have performed their duties. Still, the Commonwealth Bank and Bilfinger Berger agreed to provide a jail, have not done so and have ceased to provide funding.

Have they walked away from their contractual obligations? Lawyers aplenty will be having that one out. And taxpayers will still be asking, quite rightly, why they should have to pay to complete the project.

Here are some facets of the deal:

Bilfinger Berger issued a press release on June 13 which confirmed insolvency of Ararat JV special purpose company called Aegis Correctional Partnership Pty Ltd (ACP). That is half-owned by CBA and half by BB.

BB is writing off its $ 19 million equity investment, a material loss.

Meanwhile, a company search for CIPL Ararat Pty Ltd shows that Commonwealth Investments Pty Ltd (CIPL) injected a total of $ 23.7 million into the Ararat project via CIPL Ararat Special Purpose Company (SPC).

It is reasonable to assume that this too will all be written off although the deal is not material for CBA and therefore the bank is unlikely to disclose its losses.

Stand-offs

And now there is a Mexican stand-off where the state is stubbornly refusing to tip in and the privates in their partnership have either been shot or run for the hills.

The answer for future PPPs is to get the formula right so taxpayers are not exposed. And transparency is absolutely essential.

At this point, Victoria is refusing to ensure that the financial accounts of its partners are properly disclosed to the public. In the case of Ararat the state opted to partner with second-tier builders, and they bit the dust amid torrid market conditions.

It is simply not in the public interest for the state to be doing deals in secret with public money on the line if the project fails – the public taking both the cost and the risk of the project, whatever the outcome that is.

Last month the Victorian County Court project celebrated its ten-year anniversary. The project is halfway through its 20-year term and has been immensely profitable for the Liberty Group (a wholly-owned subsidiary of Challenger).

At the end of the project term the valuable law courts building on the corner of William and Lonsdale streets in Melbourne actually stays with the private operators (rather than reverting to the state).

This one is a deal to die for – they are not all quite that generous. Yet with these kinds of financial prizes at stake in PPP transactions the least the government can do is to ensure that their private partners properly take the project risk.

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